FTSE 100 dips in morning trading

The FTSE 100 index of leading shares shed 0.7% this morning after the US Federal Reserve downgraded its growth forecast last night and China reported that growth in factory output was close to stalling.

The blue-chip index fell by 39.97 points to 3733.71, following the Fed's announcement, after the UK markets had closed last night, that interest rates would remain unchanged, that a further round of quantitative easing was unlikely and that the US recovery is progressing "more slowly" than expected.

Meanwhile, the flash HSBC/Markit purchasing manager's index for China fell to an 11-month low of 50.1- barely ahead of the 50-point level which indicates expansion of the sector - as successive interest rate rises took their toll on demand.

Cameron Peacock, market analyst at IG Markets, said: "Investor sentiment was knocked hard ahead of yesterday's close on Wall Street as [Fed chairman] Ben Bernanke gave what can best be described as a cautious economic outlook for the US."

"This was accompanied by a defence as to why there was no need for QE3 – yet – leaving the major US indices to slump in the last couple of hours trade and the majority of Asian markets left following this lead. This is paving the way for a weaker start to trade in Europe," Peacock added.

The banks suffered on continuing concerns about the Greek debt crisis – likely to dominate a European Union meeting scheduled for later today – and news that recent proposals from an independent committee that banks should ring-fence their high street operations from their riskier investment arms could cost the three banks up to £10bn in lost profits between them.

Elsewhere, shares in BskyB added 1% after Ofcom, the British regulator, delivered its report on News Corporation's proposed $14bn acquisition of BskyB to the UK government, bringing approval to that deal a step closer.

Sign up for the Guardian Today

Our editors' picks for the day's top news and commentary delivered to your inbox each morning.